10 things to keep in mind when the stock market goes down

Many investors can lose their cool when the stock market goes down and quickly sell their stocks or other assets instead of letting them weather the storm and potentially flourish into the future.

Why the stocks market goes down?

When the stock market crashes it can often be difficult to define exactly what caused the downturn. It’s rarely ever black and white. However, there are some key factors that will often have a part to play when there is a dip in the market.

Market sentiment is one such factors that can dictate whether markets go up or down. Broadly speaking, market sentiment is typically characterised as either being bullish (positive and optimistic) or bearish (negative and pessimistic). Market sentiment has historically been observed to be a highly cyclical phenomenon which has been driven fundamentally by human emotion. Cycles in market sentiment have led to significant fluctuations in asset prices including across property and shares.

The economic climate, war and even natural disasters have also been known to drive the stock market into a downward trend.

What to do when the stock market goes down?

For those new to investing, here are a few things to keep in mind to maintain a level head and make responsible investment decisions.

1. Don’t panic

While the stock and crypto markets can often invoke a lot of passion, it’s important that rookie investors keep their emotions at bay and take a calculated approach when investing.
All markets can be volatile, so it’s best to remain calm, regardless of whether the market is experiencing a bull (when the market goes up) or bear run (when the market goes down).

2. Adopt a long term investment strategy

Rather than quickly selling stocks or cryptoassets at a whim in order to “get rich quick” when a market is falling, try adopting a long-term investment strategy instead.
If you chop and change your investments frequently, you could miss out on potential important profits that may emerge when the markets start to rise again.

3. Understand your risk tolerance

For inexperienced investors, a rapid decline in their portfolio can be unsettling to say the least, this is why it’s crucial to understand their risk tolerance when they are in the process of setting up their portfolio and not when the market is in the midst of a sell-off.

Your risk tolerance depends on a number of factors, such as your investment time horizon, what you can realistically afford, and emotional response.

4. Prepare for and limit your losses

Losses are an inevitable part of investing, but this doesn’t mean you can’t try to prepare for and limit them where possible. Ultimately, you should be ready for the worst and have a solid strategy in place to protect yourself.

You can also choose to use risk management tools such as stop losses to help protect your investments and set your risk tolerance.

5. Diversify, diversify, diversify

One way to hedge against your losses is to diversify your portfolio. Investing exclusively in tech stocks or bitcoin may cause you to lose a significant amount of money if that particular sector or asset goes down.

This is why many investors strategically make other investments in a variety of sectors, industries, and different asset classes (from stocks, crypto, commodities, real estate etc.) to spread out their exposure and reduce their risk.

Related article: Are you failing the diversification test?

6. Remember bear markets are normal

Market fluctuations are normal, both in an everyday investor (also known as a retail investor) or even a professional’s (institutional) investment journey. Whether it’s down for a matter of days, weeks or even months – history demonstrates that markets tend to recover from market corrections and go back up. Markets are influenced by a variety of external and internal factors such as political tensions, a change in government, or even during a global pandemic.

Bull and Bear markets

7. Consider buying in the dip

Market drops aren’t always a negative thing, in some cases you might be able to nab yourself a great stock at an affordable price.

When the stock goes down, price tend to get cheaper and cheaper. While some investors don’t want to buy a stock that’s falling in value, others may see its true future value and opt to buy in the dip with the goal of holding onto it until it starts to perform well again.

Related article: Buying the dip: What is it and is it worth it?

8. Be careful of timing the market

When attempting to time the market, an investor tries to predict the future market price of a stock. Meanwhile, when an investor invests to grow their wealth in the long term, they buy stocks without trying to guess when the market will be at its lowest and highest point.

Timing the market can cause a lot of stress for an investor, so do your research and really understand the stock and the market before making a decision.

9. Average into the market with dollar-cost averaging

If you’re a long-term investor, one option is to average into the market by dollar-cost averaging. This means you purchase regardless of the price, and you end up buying when the price is low and when the price is high. Over the long run, your cost will be the average of the highs and the lows.

10. Remember your reason for investing in the first place

Finally, it’s a good idea to take a step back and remember your motivations for investing. If it’s to build your nest egg so you can have a comfortable retirement, for example, you ideally don’t need the funds right now.

Take a big deep breath and ask yourself: “Do I have confidence in my investments?” If the answer is yes, then step back and enjoy the experience.

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